UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------------ --------------------------
Commission File Number: 000-51234
---------
NORTH PENN BANCORP, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 20-1882440
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
216 Adams Avenue, Scranton, PA 18503
---------------------------------------
(Address of principal executive offices)
(570) 344-6113
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: 1,443,555
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2005
and December 31, 2004
Condensed Consolidated Statements of Income for
the three and nine months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2005 and 2004
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Controls and Procedures.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
North Penn Bancorp, Inc ("the Company") was organized on November 22,
2004 in anticipation of the mutual reorganization of North Penn Bank (the
"Bank"). The reorganization was completed on June 1, 2005. The Company is a bank
holding company and parent of the Bank. The information presented for 2004 is
for the Bank and its subsidiary only, and are presented for comparative
purposes. Earnings per share information for 2004 are pro forma based on the
shares issued 2005.
NORTH PENN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
------------ ------------
2005 2004
------------ ------------
(Unaudited) Audited)
(In thousands)
ASSETS:
Cash and due from banks $ 3,187 $ 719
Interest bearing deposits 323 940
--------- ---------
Total cash and cash equivalents 3,510 1,659
Investment securities, available for sale 18,722 22,967
Investment securities, held to maturity
(fair value 2004, $503) -- 498
Equity securities at cost, substantially restricted 868 786
Loans, net of allowance for loan losses 70,988 60,829
Bank premises and equipment - net 3,427 2,713
Accrued interest receivable 441 529
Cash surrender value of life insurance 1,999 1,817
Deferred income taxes 301 291
Other real estate owned 105
Other assets 111 908
--------- ---------
TOTAL ASSETS 100,472 92,997
========= =========
LIABILITIES:
Deposits:
Non-interest bearing deposits 6,093 5,530
Interest bearing time deposits 67,861 71,812
--------- ---------
Total deposits 73,954 77,342
Other borrowed funds 12,725 7,375
Accrued interest and other liabilities 459 527
--------- ---------
TOTAL LIABILITIES 87,138 85,244
STOCKHOLDERS' EQUITY
Preferred stock, no par; 20,000,000 authorized; issued and
outstanding, none
Common stock, par value $0.10; 80,000,000 authorized; issued
and outstanding, 1,443,555 (Note 5) 63 --
Additional paid-in capital 5,651 --
Retained earnings 7,863 7,748
Accumulated other comprehensive income (243) 5
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 13,334 7,753
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,472 $ 92,997
========= =========
See notes to unaudited condensed consolidated financial statements.
1
NORTH PENN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- ------------------------
2005 2004 2005 2004
----------- ----------- ---------- ----------
INTEREST INCOME
Interest on loans $ 3,218 $ 2,568 $ 1,149 $ 967
Interest and dividends on investments 619 1,109 200 349
---------- ----------- ---------- ----------
Total interest income 3,837 3,677 1,349 1,316
INTEREST EXPENSE
Interest on deposits 1,210 1,249 418 402
Interest on borrowed funds 319 239 150 82
---------- ----------- ---------- ----------
Total interest expense 1,529 1,488 568 484
---------- ----------- ---------- ----------
NET INTEREST INCOME 2,308 2,189 781 832
PROVISION FOR LOAN LOSSES 75 -- 30 --
---------- ----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,233 2,189 751 832
---------- ----------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 84 71 29 7
Other income 124 138 44 17
Gain on sale of other real estate 40 27 -- 1
Gain on sale of securities 4 4 -- --
---------- ----------- ---------- ----------
TOTAL OTHER INCOME 252 240 73 25
OTHER EXPENSE
Salaries and employee benefits 1,186 1,068 443 362
Occupancy and equipment expense 379 422 132 143
Other expenses 596 551 158 198
---------- ----------- ---------- -----------
TOTAL OTHER EXPENSE 2,161 2,041 733 703
---------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES
324 388 91 154
INCOME TAX EXPENSE 109 103 7 60
---------- ---------- ---------- -----------
NET INCOME 215 285 84 94
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding loss arising during
period, net of income tax (248) (269) (134) 129
---------- ---------- ---------- -----------
COMPREHENSIVE INCOME $ (33) $ 16 $ (50) $ 223
========== ========== ========== ===========
Weighted average number of shares
outstanding 1,443,555 1,443,555 1,443,555 1,443,555
Earnings per share $ 0.15 $ 0.20 $ 0.06 $ 0.07
See notes to unaudited condensed consolidated financial statements.
2
NORTH PENN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands)
2005 2004
-------- --------
Operating Activities:
Net income $ 215 $ 285
Items not requiring (providing) cash
Depreciation 156 211
Provision for loan losses 75
Increase in cash surrender value of life insurance (57) (50)
Amortization and accretion of premium and discount 116 338
Net realized (gain) loss on securities (4) (4)
Changes in:
Accrued interest income and other assets 382 37
Accrued interest expense and other liabilities (68) (62)
-------- --------
Net Cash Provided by Operating Activities 815 755
-------- --------
Investing Activities:
Purchase bank premises and equipment (250) (202)
Purchase of securities "available for sale" (7,455) (385)
Sales of securities "available for sale" 4,519 1,254
Redemptions of securities "available for sale" 5,262 2,455
Redemptions of securities "held to maturity" 500 --
Purchase of mortgage-backed securities "available for sale" (1,251)
Redemptions of mortgage-backed securities "available for sale" 1,430 2,374
Redemptions of mortgage-backed securities "held to maturity" 1,340
Purchase of life insurance policies (125)
Net purchase of restricted stock (82) (94)
Net increase in loans to customers (10,234) (9,970)
Net decrease (increase) in other real estate (105) 50
-------- --------
Net Cash Used In Investing Activities (6,540) (4,429)
-------- --------
Financing Activities:
Decrease in deposits (3,388) (255)
Increase in borrowed funds 5,350 2,240
Issuance of common stock 5,714
Cash dividends paid (100)
-------- --------
Net Cash Provided By Financing Activities 7,576 1,985
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents 1,851 (1,689)
-------- --------
Cash and Cash Equivalents, January 1 1,659 3,068
-------- --------
Cash and Cash Equivalents, September 30 $ 3,510 $ 1,379
======== ========
Supplementary Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,448 $ 1,521
Income taxes 46 3
Non-cash investing and financing activities:
Unrealized gains (losses) on securities $ (369) $ (406)
See notes to unaudited condensed consolidated financial statements.
3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company was organized on November 22, 2004 to be the bank holding
company for North Penn Bank (formerly "North Penn Savings and Loan
Association") in connection with the Bank's mutual holding company
reorganization and minority stock issuance. The Company's common stock
trades on the OTC Bulletin Board under the symbol "NPEN". The Bank
operates from four offices under a state savings bank charter and
provides financial services to individuals and corporate customers
primarily in Northeastern Pennsylvania. The Bank's primary deposit
products are savings and demand deposit accounts and certificates of
deposit. Its primary lending products are real estate, commercial, and
consumer loans.
The accounting policies of North Penn Bancorp, Inc., North Penn Bank
and Norpenco (collectively referred to herein as the "Company") conform
with accounting principles generally accepted in the United States of
America and with general practice within the banking industry. A
description of the significant accounting policies is presented below.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance
with accounting principles generally accepted in the United States and
conform to general practices within the banking industry. The notes to
the consolidated financial statements contain a summary of the
Company's significant accounting policies, including significant
estimates, presented in the 10-KSB for the year ended December 31,
2004. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions and are
integral to the understanding of reported results. Critical accounting
policies are those policies that management believes are the most
important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are
difficult, subjective, or complex.
Allowance for Loan Losses - The allowance for loan losses provides
coverage for probable losses inherent in the Company's loan portfolio.
Management evaluates the adequacy of the allowance for credit losses
each quarter based on changes, if any, in underwriting activities, the
loan portfolio composition (including product mix and geographic,
industry or customer-specific concentrations), trends in loan
4
performance, regulatory guidance and economic factors. This evaluation
is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of
specific and expected losses, including volatility of default
probabilities, ratings migrations, loss severity and economic and
political conditions. The allowance is increased through provisions
charged to operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative
risk characteristics of the loan portfolio. The allowance recorded for
commercial loans is based on reviews of individual credit relationships
and an analysis of the migration of commercial loans and actual loss
experience. The allowance recorded for homogeneous consumer loans is
based on analysis of loan mix, risk characteristics of the portfolio,
fraud loss and bankruptcy experiences, and historical losses, adjusted
for current trends, for each homogeneous category or group of loans.
The allowance for credit losses relating to impaired loans is based on
the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the
loan's effective interest rate. A loan is considered impaired when,
based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan
agreement. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on
a case-by-case basis, taking in to consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Because the Company reviews loans on an
individual basis for impairment, the Company does not use a specific
timeframe of delinquency after which a specific loan is assumed to be
impaired.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
Regardless of the extent of the Company's analysis of customer
performance, portfolio trends or risk management processes, certain
inherent but undetected losses are probable within the loan portfolio.
This is due to several factors including inherent delays in obtaining
information regarding a customer's financial condition or changes in
their unique business conditions, the judgmental nature of individual
loan evaluations, collateral assessments and the interpretation of
economic trends. Volatility of economic or customer-specific conditions
affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to
establish allowances for homogeneous groups of loans are among other
5
factors. The Company estimates a range of inherent losses related to
the existence of these exposures. The estimates are based upon the
Company's evaluation of imprecision risk associated with the commercial
and consumer allowance levels and the estimated impact of the current
economic environment.
Mortgage Servicing Rights - Mortgage servicing rights ("MSRs")
associated with loans originated and sold, where servicing is retained,
are capitalized and included in the consolidated balance sheet. The
value of the capitalized servicing rights represents the present value
of the future servicing fees arising from the right to service loans in
the portfolio. Critical accounting policies for MSRs relate to the
initial valuation and subsequent impairment tests. The methodology used
to determine the valuation of MSRs requires the development and use of
a number of estimates, including anticipated principal amortization and
prepayments of that principal balance. Events that may significantly
affect the estimates used are changes in interest rates, mortgage loan
prepayment speeds and the payment performance of the underlying loans.
The carrying value of the MSRs is periodically reviewed for impairment
based on a determination of fair value. For purposes of measuring
impairment, the servicing rights are compared to a valuation prepared
on a discounted cash flow methodology, utilizing current prepayment
speeds and discount rates. Impairment, if any, is recognized through a
valuation allowance and is recorded as amortization of intangible
assets. As of September 30, 2005 and December 31, 2004, mortgage
servicing rights had carrying values of $24,000 and $29,000,
respectively.
PRINCIPLES OF CONSOLIDATION
The financial statements of North Penn Bancorp, Inc. have been
consolidated with those of its wholly-owned subsidiary, North Penn
Bank, and the Bank's wholly-owned subsidiary, Norpenco, Inc.,
eliminating intercompany accounts. Norpenco, Inc. is used by the Bank
to make equity investments in other banking companies.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principals
for interim financial information. In the opinion of management, all
adjustments that are of a normal recurring nature and are considered
necessary for a fair presentation have been included. They are not,
however, necessarily indicative of the results of consolidated
operations for a full year.
6
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in the satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed real
estate, management periodically obtains independent appraisals for
significant properties.
2. INVESTMENT SECURITIES
The Bank's investments in securities are classified in two categories
and accounted for as follows:
Securities Held-to-Maturity. Bonds, notes and debentures for which the
Bank has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion
of discounts.
Securities Available-for-Sale. Securities available-for-sale consist of
bonds, notes, debentures and equity securities not classified to be
held-to-maturity and are carried at fair value with unrealized holding
gains and losses, net of tax, reported as a separate component of other
comprehensive income until realized.
Purchase premiums and discounts are recognized in interest income on
the straight-line basis over the terms of the securities, which
approximates the interest method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are
recorded on the trade date and are determined using the specific
identification method and are reported as other income in the statement
of income.
7
The amortized cost and fair value of investment securities at September
30, 2005 and December 31, 2004 are as follows:
AVAILABLE-FOR-SALE
SEPTEMBER 30, 2005
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
U.S. Agency securities $ 2,385 $ -- $ (47) $ 2,338
Mortgage-backed securities 6,909 2 (178) 6,733
Municipal securities 7,576 -- (140) 7,436
Other securities 1,518 7 (9) 1,516
------- ------- ------- -------
Total debt securities 18,388 9 (374) 18,023
Equity securities 703 24 (28) 699
------- ------- ------- -------
Total Available for Sale $19,091 $ 33 $ (402) $18,722
======= ======= ======= =======
AVAILABLE-FOR-SALE
DECEMBER 31, 2004
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
U.S. Agency securities $ 2,385 $ -- $ (35) $ 2,350
Mortgage-backed securities 10,882 10 (116) 10,776
Municipal securities 875 1 (3) 873
Other securities 8,544 143 (1) 8,686
------- ------- ------- -------
Total debt securities 22,686 154 (155) 22,865
Equity securities 273 11 (2) 282
------- ------- ------- -------
Total Available for Sale $22,959 $ 165 $ (157) $22,967
======= ======= ======= =======
HELD-TO-MATURITY
DECEMBER 31, 2004
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
Municipal securities $ 498 5 -- 503
------- ------- ------- -------
Total Available for Sale $ 498 $ 5 $ -- $ 503
======= ======= ======= =======
The gross fair value and unrealized losses of the Bank's
investments, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized
loss position at September 30, 2005 is as follows:
8
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------- -------- -------- -------- -------- --------
U.S. Agencies $ -- $ -- $ 2,338 $ (47) $ 2,338 $ (47)
Mortgage-backed -- -- 6,599 (178) 6,599 (178)
Municipal 7,436 (140) -- -- 7,436 (140)
Other securities -- -- 498 (9) 498 (9)
Equity securities 699 (28) -- -- 699 (28)
-------- -------- -------- -------- -------- --------
$ 8,135 $ (168) $ 9,435 $ (234) $ 17,570 $ (402)
======== ======== ======== ======== ======== ========
The Bank invests in debt securities of the U.S. government, U.S.
agencies, U.S. sponsored agencies, obligations of states and political
subdivisions and corporate obligations. Changes in market value of all
debt securities can result from changes in interest rates. Changes in
credit quality can affect securities of states and political
subdivisions and corporate obligations. The changes in market value of
the debt securities held by the Bank have been due to changes in
interest rates, and because the Bank has the ability to hold these
investments until maturity, the Bank does not consider these
investments to be other-than-temporarily impaired at September 30,
2005.
The Bank invests in equity securities of other banks through its
subsidiary, Norpenco, Inc. Management has evaluated the near-term
prospects of the issuers with unrealized losses, in relation to the
severity and duration of the impairment. Based on that evaluation, and
the Bank's ability to hold these stocks for a reasonable period of time
sufficient for a forecasted recovery of fair value, the management does
not consider these investments to be other-than-temporarily impaired at
September 30, 2005.
3. LOANS
September 30, December 31,
2005 2004
------- -------
(In thousands
Real estate mortgages:
Construction and land development $ 596 $ 2,030
Residential, 1 - 4 family 37,147 35,892
Residential, multi-family -- 256
Commercial 23,902 13,640
------- -------
Total real estate mortgages 61,645 51,818
Commercial 1,269 347
Consumer 9,068 9,595
------- -------
Total loans 71,982 61,760
Allowance for loan loss 994 931
------- -------
Total loans, net $70,988 $60,829
======= =======
Loans are stated at the principal amount outstanding, net of any
unearned income, deferred loan fees and the allowance for loan losses.
Commercial loans secured by real estate have been reclassified as
mortgages for September 2005 and December 2004. Interest on mortgage
and commercial loans is calculated at the time of payment based on the
current outstanding balance of the loan. Interest on consumer loans is
recognized on the simple interest method.
9
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the bank's past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay, the
estimated value of any underlying collateral and current economic
conditions.
Uncollectable interest on loans that are contractually past due 90 days
or more is credited to an allowance established through management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
The company granted a loan to the North Penn Employee Stock Ownership
Plan with a balance at September 30, 2005 of $545,000. Repayment of the
loan will occur over 15 years with equal annual payments of principal
and quarterly payments of interest at prime (6.75% at September 30,
2005), which will be funded by the Bank's annual contributions to the
plan, as approved by the Board of Directors.
4. OTHER BORROWINGS
The Bank has a line of credit agreement with the Federal Home Loan Bank
of Pittsburgh for short term borrowings varying from one day to three
years. Advances on this line must be secured by "qualifying collateral"
as defined in the agreement and bear interest at fixed or variable
rates as determined at the date advances are made. The line expires in
June, 2006. At September 30, 2005, the Bank borrowed $725,000 in
overnight funds.
The Bank also has two term loans from the Federal Home Loan Bank. One
is a $5,000,000 term loan at a fixed rate of 6.19%, which was issued in
July of 2000, and matures July of 2010. The loan requires monthly
interest payments, with the principal due at maturity. The other loan
is $7,000,000 issued in July of 2005 and matures July of 2015. The
interest rate is fixed at 4.34%, for two years, at which time the FHLB
has the option to convert it to an adjustable rate if the related index
reaches the strike rate of 8.00%. Interest is due quarterly and the
principal is due at maturity.
10
5. EARNINGS PER SHARE
Earnings per share are calculated based on 1,443,555 shares outstanding
for both the current and prior periods. The prior periods did not have
stock issued and should be considered pro forma figures. The 1,443,555
outstanding at September 30, 2005, includes 778,451 issued to the
mutual holding company, and 28,277 issued to the charitable foundation
in conjunction with the reorganization effective June 1, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING INFORMATION
In addition to historical information, this Report on Form 10-QSB may
include certain forward-looking statements based on current management
expectations. The Company's actual results could differ materially from those
management expectations. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulation of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality of competition, changes
in the quality or composition of the Company's loan or investment portfolios,
changes in accounting principles, policies or guidelines, and other economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. Further description of the
risks and uncertainties to the business are included in detail under the caption
"Liquidity and Capital Reserves."
FINANCIAL CONDITION
Our total assets increased $7,475,000 from $92,997,000 at December 31, 2004 to
$100,472,000 at September 30, 2005, or 8%. The increase was primarily in loans.
Loans increased $10,159,000 from $60,829,000 at December 31, 2004 to $70,988,000
at September 30, 2005, or 17%. Investment securities had a net decrease of
$4,743,000 primarily to fund loans, even though the company borrowed $7,000,000
and purchased bonds as part of a leveraging strategy. The decrease included
$4,428,000 in sales of securities and the remainder in maturities and principal
payments on mortgage-backed securities. All of the company's securities
classified as "held to maturity" have matured.
The increase in loans as previously mentioned is mainly due to an increase in
commercial loans. The Bank has been increasing its commercial loan portfolio to
diversify its loan portfolio and reduce its exposure to the interest rate risk
associated with residential mortgages. Most of the Bank's commercial loans are
secured by real estate in order to minimize their risk.
The allowance for loan loss was $994,000 at September 30, 2005, compared to
$931,000 at December 31, 2004. We recorded $30,000 in loan loss provision for
the three months and $75,000 for the nine months ended September 30, 2005. The
Bank charged-off $14,000 in loans for the three and nine months ended in
September, had no recoveries for the three months ended in September 2005, but
$2,000 for the nine months ended in September 2005. The increase in the
provision is due to the increase in the Bank's portfolio of commercial loans.
Management assesses the adequacy of the allowance for loan losses based on
evaluating known and inherent risks in the loan portfolio and upon management's
continuing analysis of the factors underlying the quality of the loan portfolio.
While management believes that, based on information currently available, the
11
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurance can be given that the level of the
allowance for loan losses is sufficient to cover future possible loan losses
incurred by the Bank or that future adjustments to the allowance for loan losses
will not be necessary if economic and other conditions differ substantially from
the economic and other conditions used by management to determine the current
level of the allowance for loan losses. Management may in the future increase
the level of the allowance for loan losses as a percentage of total loans and
non-performing loans in the event it increases the level of commercial or
consumer lending as a percentage of its total loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require the
Bank to provide additions to the allowance based upon judgments different from
management.
Non-performing loans, which are loans past due 90 days or more and non-accruing
loans, totaled $568,000 at September 30, 2005, compared to $1,357,000 at
December 31, 2004. The improvement was primarily in non-accruing residential
mortgages which decreased by $783,000. The ratio of the Bank's allowance for
loan losses to total loans was 1.38% at September 30, 2005 and 1.51% at December
31, 2004.
Total deposits decreased $3,388,000 or 5% from $77,342,000 at December 31, 2004
to $73,954,000 at September 30, 2005. Non-interest bearing deposits increased by
$563,000 or 10%, and interest bearing deposits declined $3,951,000 or 6%.
Other borrowings increased $5,350,000 from $7,375,000 at December 31, 2004 to
$12,725,000 at September 30, 2005, due to a second term loan of $7 million and
reductions in overnight borrowings from the Federal Home Loan Bank of
Pittsburgh. The Bank now has two term loans totaling $12 million from the FHLB,
along with overnight borrowing availability on its credit line, which are
discussed in Note 4.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Net income totaled $84,000 for the three months ended September 30, 2005
compared to $94,000 for the three months ended September 30, 2004, a decrease of
$10,000, or 11%. Net income decreased primarily due to increased interest
expense on deposits and borrowed funds of $84,000, and an increase in provision
for loan loss of $30,000. The increased expense was partially offset by
decreased income tax expense of $53,000 due to the purchase of tax-exempt bonds.
Interest income increased $33,000 or 3%, to $1,349,000 in 2005, compared to
$1,316,000 in 2004. Interest on loans increased $182,000 or 19%, from $967,000
in 2004 to $1,149,000 in 2005. The increases are due to higher loan volumes and
the increase in the prime rate. Interest and dividends on investments decreased
$149,000 or 43% from $349,000 in 2004, to $200,000 in 2005, due to lower
balances of investments.
12
Interest expense increased $84,000 or 17% from $484,000 in 2004 to $568,000 in
2005. Interest on deposits increased $16,000 or 4%, from $402,000 in 2004 to
$418,000 in 2005. Interest on borrowed funds increased $68,000 or 83% from
$82,000 in 2004 to $150,000 in 2005 due primarily to the additional term loan
from the FHLB of $7,000,000.
Net interest income decreased $51,000 or 6%, from $832,000 to $781,000.
Other income for the second quarter increased $48,000 or 192%, from $25,000 in
2004, to $73,000 in 2005, mostly due to overdraft and service fee increases.
Total other expenses increased $30,000 or 4% from $703,000 in 2004 to $733,000
in 2005. Salaries and employee benefits increased $81,000 or 22% from $362,000
in 2004, to $443,000 in 2005, while occupancy and equipment expense decreased
$11,000, or 8% from $143,000 in 2004, to $132,000 in 2005, and other expenses
decreased $40,000 or 20%, from $198,000 in 2004 to $158,000 in 2005.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Net income totaled $215,000 for 2005 compared to $285,000 for 2004, a decrease
of $70,000 or 24%. Higher employee expenses and the charitable contribution to
fund the North Penn Charitable Foundation account for the lower net income.
Interest income increased $160,000 or 4%, to $3,837,000 for 2005 compared to
$3,677,000 for 2004. Interest on loans increased $650,000 or 25%, from
$2,568,000 for 2004, to $3,218,000 for 2005. The increases are due to higher
loan volumes and increases in the prime rate. Interest on investments decreased
$490,000 or 44% from $1,109,000 to $619,000 due to lower balances of
investments.
Interest expense increased $41,000 or 3% from $1,488,000 in 2004 to $1,529,000
in 2005. Interest on deposits decreased $39,000 or 3%, from $1,249,000 in 2004
to $1,210,000 in 2005. Interest on borrowed funds increased $80,000 or 33% due
primarily to the second term loan.
Provision for loan loss increased from $0 in 2004 to $70,000 in 2005.
Net interest income increased $119,000 or 5%, from $2,189,000 to $2,308,000.
Other income increased $12,000 or 5% from $240,000 in 2004 to $252,000 in 2005.
Total other expenses increased $120,000 or 6% from $2,041,000 in 2004 to
$2,161,000 in 2005. Salaries and employee benefits increased $118,000 or 11%
from $1,068,000 in 2004 to $1,186,000 in 2005, while occupancy and equipment
expense decreased $43,000 or 10% from $422,000 in 2004 to $379,000 in 2005.
Higher salaries and medical insurance costs account for the increase in salaries
and employee benefits. Other expenses increased $45,000 or 8% from $551,000 in
2004 to $596,000 in 2005. Other expenses would have declined except for the
$100,000 charitable contribution the Bank made to the North Penn Charitable
Foundation, in conjunction with the stock offering.
13
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and investments, FHLB advances and proceeds from mortgage loan
sales. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions, and competition. The Bank's
regulators require the Bank to maintain sufficient liquidity to ensure its safe
and sound operation.
A review of the Consolidated Statement of Cash Flows included in the
accompanying financial statements shows that the Bank's cash and cash
equivalents increased $1,851,000 for the nine months ended September 30, 2005.
During that period, cash was primarily provided from the issuance of stock,
sales and redemptions of securities, other borrowings, reduction of deposits in
other banks and earnings. During the period, cash was used primarily to fund
loans to customers, purchase securities, and fund a decrease in customer's
deposits.
At September 30, 2005 and December 31, 2004, the Bank exceeded all of its
regulatory capital requirements as indicated in the following table.
September 30, December 31,
2005 2004
-----------------------------------
(Dollars in Thousands)
Tier 1 capital:
Equity, less unrealized gains or losses $11,045 $ 7,744
Tier 2 capital:
Loan loss reserves includable in Tier 2 880 803
Total risk-based capital 11,925 8,547
Risk-adjusted assets (including off-balance sheet items) 70,275 64,150
Tier 1 capital ratio (4.00% required) 15.72% 12.07%
Total risked-based capital ratio (8.00% required) 16.97% 13.33%
Tier 1 leverage ratio 11.19% 8.36%
RELATED PARTIES
The Company does not have any material transactions involving related persons or
entities, other than traditional banking transactions, which are made on the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive officer
and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Company's financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
11.1 Statement re: computation of per share earnings: Refer to Note 5
31.1 Rule 13a-14(a) /15d-14(a) Chief Executive Officer Certification
31.1 Rule 13a-14(a) /15d-14(a) Chief Financial Officer Certification
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
FORM 8-K
None.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be so signed on its behalf by the undersigned, thereunto duly
authorized.
North Penn Bancorp, Inc
Dated: November 10, 2005 /s/ Frederick L. Hickman
--------------------------- -------------------------
Frederick L. Hickman
President and
Chief Executive Officer
Dated: November 10, 2005 /s/ Philip O. Farr
---------------------------- -------------------------
Philip O. Farr
Senior Vice President and
Chief Financial Officer